##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 0-18279
 TRI-COUNTY FINANCIAL CORPORATION
  Maryland
    
    
    
    52-1652138(State or other jurisdiction of
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    
    Identification No.)3035 Leonardtown Road, Waldorf, Maryland
    
    
    
    20601(Address of principal executive offices)
    
    
    
    (Zip Code)
 (301) 645-5601
 None
  Common Stock, par value $.01 per share
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 1.
    
    Portions of the Annual Report to Stockholders for the year ended December 31, 2006. (Part
II)2.
    
    Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders. (Part III)




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##### 



INDEX
 PagePart IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    23Item 1B. Unresolved Staff Comments
    
    
    26Item 2. Properties
    
    
    27Item 3. Legal Proceedings
    
    
    27Item 4. Submission of Matters to a Vote of Securities Holders
    
    
    27Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    27Item 6. Selected Financial Data
    
    
    28Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    28Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8. Financial Statements and Supplementary Data
    
    
    29Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    29Item 9A. Controls and Procedures
    
    
    29Item 9B. Other Information
    
    
    29Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    29Item 11. Executive Compensation
    
    
    30Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    30Item 13. Certain Relationships and Related Transactions
    
    
    31Item 14. Principal Accountant Fees and Services
    
    
    31Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    31EX-10.9 RETIREMENT PLAN FOR DIRECTORSEX-10.21 DEFERRED COMPENSATION PLANEX-13 ANNUAL REPORTEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23 CONSENT OF STEGMAN & COMPANYEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32 SECTION 906, CERTIFICATION OF THE CEO & CFO




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##### Table of Contents



PART I
 This report contains certain forward-looking statements within the meaning of the federal
securities laws. These statements are not historical facts, rather statements based on Tri-County
Financial Corporations current expectations regarding its business strategies, intended results
and future performance. Forward-looking statements are preceded by terms such as expects,
believes, anticipates, intends and similar expressions.
 Managements ability to predict results or the effect of future plans or strategies is
inherently uncertain. Factors that could affect actual results include interest rate trends, the
general economic climate in the market area in which Tri-County Financial Corporation operates, as
well as nationwide, Tri-County Financial Corporations ability to control costs and expenses,
competitive products and pricing, loan delinquency rates and changes in federal and state
legislation and regulation. These factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements. Tri-County Financial
Corporation assumes no obligation to update any forward-looking statements.
 
 Item 1. Business
    Available Information
  Market Area
  1




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##### Table of Contents



Competition
  Lending Activities
 General.
 Residential First Mortgage Loans.
   2




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##### Table of Contents



Commercial Real Estate and Other Non-Residential Real Estate Loans.
  Construction and Land Development Loans.
 3




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##### Table of Contents



Home Equity and Second Mortgage Loans.
  Commercial Loans.
 4




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##### Table of Contents



Consumer Loans.
 Commercial Equipment Loans.
 5




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##### Table of Contents



Loan Portfolio Analysis.
 At December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Real estate loans:Commercial
    
    $
    177,924
    
    
    
    41.69
    %
    
    $
    166,851
    
    
    
    44.66
    %
    
    $
    136,342
    
    
    
    46.51
    %
    
    $
    93,825
    
    
    
    42.46
    %
    
    $
    74,292
    
    
    
    37.07
    %Residential first mortgage
    
    
    80,781
    
    
    
    18.93
    
    
    
    73,628
    
    
    
    19.71
    
    
    
    59,087
    
    
    
    20.16
    
    
    
    42,971
    
    
    
    19.45
    
    
    
    48,976
    
    
    
    24.44Construction and land development
    
    
    42,746
    
    
    
    10.01
    
    
    
    32,608
    
    
    
    8.73
    
    
    
    17,598
    
    
    
    6.00
    
    
    
    19,599
    
    
    
    8.87
    
    
    
    14,579
    
    
    
    7.27Home equity and second mortgage
    
    
    24,572
    
    
    
    5.76
    
    
    
    25,884
    
    
    
    6.93
    
    
    
    23,925
    
    
    
    8.16
    
    
    
    19,562
    
    
    
    8.85
    
    
    
    19,007
    
    
    
    9.48Commercial loans
    
    
    79,630
    
    
    
    18.66
    
    
    
    54,738
    
    
    
    14.65
    
    
    
    39,137
    
    
    
    13.35
    
    
    
    30,436
    
    
    
    13.77
    
    
    
    29,947
    
    
    
    14.94Consumer loans
    
    
    2,813
    
    
    
    0.66
    
    
    
    3,128
    
    
    
    0.84
    
    
    
    3,462
    
    
    
    1.18
    
    
    
    4,097
    
    
    
    1.85
    
    
    
    4,623
    
    
    
    2.31Commercial equipment
    
    
    18,288
    
    
    
    4.29
    
    
    
    16,742
    
    
    
    4.48
    
    
    
    13,596
    
    
    
    4.64
    
    
    
    10,473
    
    
    
    4.74
    
    
    
    9,007
    
    
    
    4.49Total loans
    
    
    426,754
    
    
    
    100.00
    %
    
    
    373,579
    
    
    
    100.00
    %
    
    
    293,147
    
    
    
    100.00
    %
    
    
    220,963
    
    
    
    100.00
    %
    
    
    200,431
    
    
    
    100.00
    %Less: Deferred loan fees, net
    
    
    490
    
    
    
    
    
    
    
    604
    
    
    
    
    
    
    
    764
    
    
    
    
    
    
    
    650
    
    
    
    
    
    
    
    668Loan loss reserve
    
    
    3,784
    
    
    
    
    
    
    
    3,383
    
    
    
    
    
    
    
    3,058
    
    
    
    
    
    
    
    2,573
    
    
    
    
    
    
    
    2,314Loans receivable, net
    
    $
    422,480
    
    
    
    
    
    
    $
    369,592
    
    
    
    
    
    
    $
    289,325
    
    
    
    
    
    
    $
    217,740
    
    
    
    
    
    
    $
    197,449
 6




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##### Table of Contents



Loan Originations, Purchases and Sales.
 Loan Approvals, Procedures and Authority.
  Loans to One Borrower.
 Loan Commitments.
 7




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##### Table of Contents



Maturity of Loan Portfolio.
 Due after one yearDue within one year
    
    
    through five years
    
    
    Due more than fiveafter
    
    
    from
    
    
    years fromDecember 31, 2006
    
    
    December 31, 2006
    
    
    December 31, 2006(Dollars in thousands)Real estate loansCommercial
    
    $
    22,700
    
    
    $
    25,548
    
    
    $
    129,676Residential first mortgage
    
    
    3,698
    
    
    
    13,642
    
    
    
    63,441Construction and land development
    
    
    39,032
    
    
    
    3,714
    
    
    
    Home equity and second mortgage
    
    
    15,990
    
    
    
    3,165
    
    
    
    5,417Commercial loans
    
    
    79,630
    
    
    
    
    
    
    
    Consumer loans
    
    
    1,000
    
    
    
    1,553
    
    
    
    260Commercial equipment
    
    
    5,869
    
    
    
    10,780
    
    
    
    1,639Total loans
    
    $
    167,919
    
    
    $
    58,402
    
    
    $
    200,433
  Floating orFixed Rates
    
    
    Adjustable Rates
    
    
    Total(Dollars in thousands)Real estate loansCommercial
    
    $
    15,348
    
    
    $
    139,876
    
    
    $
    155,224Residential first mortgage
    
    
    66,614
    
    
    
    10,469
    
    
    
    77,083Construction and land development
    
    
    
    
    
    
    3,714
    
    
    
    3,714Home equity and second mortgage
    
    
    8,582
    
    
    
    
    
    
    
    8,582Commercial loans
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    1,813
    
    
    
    
    
    
    
    1,813Commercial equipment
    
    
    12,419
    
    
    
    
    
    
    
    12,419Total Loans
    
    $
    104,776
    
    
    $
    154,059
    
    
    $
    258,835
 Delinquencies.
 Non-Performing Assets and Asset Classification.
 8




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Foreclosed Real Estate
   9




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##### Table of Contents



Delinquent and Nonaccrual Loans
  At December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands)Loans accounted for on a nonaccrual basis:Real estate loansCommercial
    
    $
    390
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Residential first mortgage
    
    
    273
    
    
    
    273
    
    
    
    273
    
    
    
    275
    
    
    
    278Construction and land development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Home equity and second mortgage
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    49Commercial loans
    
    
    303
    
    
    
    258
    
    
    
    393
    
    
    
    103
    
    
    
    269Consumer loans
    
    
    80
    
    
    
    7
    
    
    
    9
    
    
    
    1
    
    
    
    1Commercial equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,046
    
    
    
    591
    
    
    
    675
    
    
    
    379
    
    
    
    597Total non-performing loans
    
    $
    1,046
    
    
    $
    591
    
    
    $
    675
    
    
    $
    379
    
    
    $
    597
   10




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##### Table of Contents



At December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands)Balance at beginning of period
    
    $
    3,383
    
    
    $
    3,058
    
    
    $
    2,573
    
    
    $
    2,314
    
    
    $
    2,282Charge-offsReal estate loans:Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential first mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and land development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Home equity and second mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Commercial loans
    
    
    
    
    
    
    3
    
    
    
    1
    
    
    
    35
    
    
    
    59Consumer loans
    
    
    8
    
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    15Commercial equipment
    
    
    
    
    
    
    4
    
    
    
    14
    
    
    
    24
    
    
    
    Total charge-offs
    
    
    8
    
    
    
    9
    
    
    
    18
    
    
    
    61
    
    
    
    131RecoveriesReal estate loans:Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential first mortgage
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    Construction and land development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Home equity and second mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    3
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    3Commercial equipment
    
    
    
    
    
    
    5
    
    
    
    8
    
    
    
    2
    
    
    
    Total recoveries
    
    
    3
    
    
    
    5
    
    
    
    50
    
    
    
    2
    
    
    
    3Net (recoveries) charge-offs
    
    
    5
    
    
    
    4
    
    
    
    (32
    )
    
    
    58
    
    
    
    128Provision for loan losses
    
    
    406
    
    
    
    329
    
    
    
    453
    
    
    
    317
    
    
    
    160Balance at end of period
    
    $
    3,784
    
    
    $
    3,383
    
    
    $
    3,058
    
    
    $
    2,573
    
    
    $
    2,314Ratio of net charge-offs (recoveries) to average loans
outstanding during the year
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    (0.01
    )%
    
    
    0.02
    %
    
    
    0.06
    %
 11




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##### Table of Contents



At December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands)Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachCategory
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Categoryto Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansReal estate loansCommercial
    
    $
    1,479
    
    
    
    41.69
    %
    
    $
    1,466
    
    
    
    44.66
    %
    
    $
    1,909
    
    
    
    46.51
    %
    
    $
    1,409
    
    
    
    42.46
    %
    
    $
    1,077
    
    
    
    37.07
    %Residential first mortgage
    
    
    97
    
    
    
    18.93
    
    
    
    73
    
    
    
    19.71
    
    
    
    59
    
    
    
    20.16
    
    
    
    64
    
    
    
    19.45
    
    
    
    118
    
    
    
    24.44Construction and landdevelopment
    
    
    662
    
    
    
    10.01
    
    
    
    502
    
    
    
    8.73
    
    
    
    132
    
    
    
    6.00
    
    
    
    281
    
    
    
    8.87
    
    
    
    211
    
    
    
    7.27Home equity and second
mortgage
    
    
    104
    
    
    
    5.76
    
    
    
    109
    
    
    
    6.93
    
    
    
    120
    
    
    
    8.16
    
    
    
    244
    
    
    
    8.85
    
    
    
    276
    
    
    
    9.48Commercial loans
    
    
    1,135
    
    
    
    18.66
    
    
    
    709
    
    
    
    14.65
    
    
    
    530
    
    
    
    13.35
    
    
    
    381
    
    
    
    13.77
    
    
    
    434
    
    
    
    14.94Consumer loans
    
    
    126
    
    
    
    0.66
    
    
    
    124
    
    
    
    0.84
    
    
    
    138
    
    
    
    1.18
    
    
    
    63
    
    
    
    1.85
    
    
    
    68
    
    
    
    2.31Commercial equipment
    
    
    181
    
    
    
    4.29
    
    
    
    400
    
    
    
    4.48
    
    
    
    170
    
    
    
    4.64
    
    
    
    131
    
    
    
    4.71
    
    
    
    130
    
    
    
    4.49Total allowance for
loan losses
    
    $
    3,784
    
    
    
    100.00
    %
    
    $
    3,383
    
    
    
    100.00
    %
    
    $
    3,058
    
    
    
    100.00
    %
    
    $
    2,573
    
    
    
    100.00
    %
    
    $
    2,314
    
    
    
    100.00
    %
 12




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting Policies
 Investment Activities
   At December 31,2006
    
    
    2005
    
    
    2004(Dollars in thousands)Asset-backed securitiesFreddie Mac and Fannie Mae
    
    $
    72,602
    
    
    $
    84,334
    
    
    $
    155,678Other
    
    
    29,956
    
    
    
    37,383
    
    
    
    16,535Total asset-backed securities
    
    
    102,558
    
    
    
    121,717
    
    
    
    172,213Freddie Mac and Fannie Mae stock
    
    
    342
    
    
    
    719
    
    
    
    766Bond mutual funds
    
    
    3,262
    
    
    
    127
    
    
    
    630Treasury bills
    
    
    800
    
    
    
    499
    
    
    
    300Other investments
    
    
    145
    
    
    
    604
    
    
    
    1,781Total investment securities
    
    
    107,107
    
    
    
    123,666
    
    
    
    175,690FHLB and Federal Reserve Bank stock
    
    
    6,100
    
    
    
    7,190
    
    
    
    6,144Total investment securities and FHLB
and Federal Reserve Bank stock
    
    $
    113,207
    
    
    $
    130,856
    
    
    $
    181,834
 13




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##### Table of Contents



After One
    
    
    After FiveOne Year or Less
    
    
    Through Five Years
    
    
    Through Ten Years
    
    
    After Ten YearsAmortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    AverageCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield(Dollars in thousands)Investment securities available
for saleCorporate equity securities
    
    $
    255
    
    
    
    4.70
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %Asset-backed securities
    
    
    143
    
    
    
    7.23
    %
    
    
    749
    
    
    
    5.46
    %
    
    
    3,987
    
    
    
    4.90
    %
    
    
    1,003
    
    
    
    4.79
    %Mutual Funds
    
    
    3,246
    
    
    
    4.30
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Total investment securities
available for sale
    
    $
    3,644
    
    
    
    4.45
    %
    
    $
    749
    
    
    
    0.00
    %
    
    $
    3,987
    
    
    
    4.90
    %
    
    $
    1,003
    
    
    
    4.79
    %Investment securities held-to-
maturityAsset-backed securities
    
    $
    7,240
    
    
    
    4.94
    %
    
    $
    29,248
    
    
    
    5.04
    %
    
    $
    29,881
    
    
    
    5.36
    %
    
    $
    30,492
    
    
    
    5.79
    %Treasury bills
    
    
    800
    
    
    
    5.04
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Other investments
    
    
    11
    
    
    
    4.68
    %
    
    
    134
    
    
    
    4.68
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Total investment securities
held-to-maturity
    
    $
    8,051
    
    
    
    4.95
    %
    
    $
    29,382
    
    
    
    5.03
    %
    
    $
    29,881
    
    
    
    5.36
    %
    
    $
    30,492
    
    
    
    5.79
    %
  Issuer
    
    Book Value
    
    RatingWells Fargo
    
    $
    6,023,058
    
    
    AAAMorgan Stanley
    
    $
    5,012,318
    
    
    AAACountrywide
    
    $
    4,036,168
    
    
    AAA
 14




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##### Table of Contents



Deposits and Other Sources of Funds
 General.
 Deposits.
  2006
    
    
    2005
    
    
    2004Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in thousands)Savings
    
    $
    34,570
    
    
    
    1.18
    %
    
    $
    36,696
    
    
    
    0.59
    %
    
    $
    37,776
    
    
    
    0.47
    %Interest-bearing demand and money
market accounts
    
    
    104,410
    
    
    
    2.92
    
    
    
    89,394
    
    
    
    1.55
    
    
    
    85,212
    
    
    
    0.89Certificates of deposit
    
    
    204,675
    
    
    
    4.21
    
    
    
    146,512
    
    
    
    3.32
    
    
    
    93,267
    
    
    
    2.46Total interest-bearing deposits
    
    
    343,655
    
    
    
    3.51
    
    
    
    272,602
    
    
    
    2.37
    
    
    
    216,255
    
    
    
    1.49Noninterest-bearing demand deposits
    
    
    42,030
    
    
    
    
    
    
    
    39,855
    
    
    
    
    
    
    
    32,909
    
    
    
    Total
    
    $
    385,685
    
    
    
    3.13
    
    
    $
    312,457
    
    
    
    2.07
    
    
    $
    249,164
    
    
    
    1.29
  CertificatesMaturity Period
    
    of Deposit(Dollars in thousands)Three months or less
    
    
    $26,242Three through six months
    
    
    7,912Six through twelve months
    
    
    17,785Over twelve months
    
    
    11,057Total
    
    
    $62,996
 Borrowings.
 15




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##### Table of Contents



At or for theYear Ended December 31,2006
    
    2005
    
    2004(Dollars in thousands)Long-term debt outstanding at end of period
    
    $
    96,046
    
    
    $
    107,824
    
    
    $
    82,931Weighted average rate on outstanding long-term debt
    
    
    4.42
    %
    
    
    4.25
    %
    
    
    4.20
    %Maximum outstanding long-term debt of any month end
    
    $
    108,078
    
    
    $
    107,826
    
    
    $
    82,931Average outstanding long-term debt
    
    $
    101,520
    
    
    $
    93,409
    
    
    $
    73,830Approximate average rate paid on long-term debt
    
    
    4.42
    %
    
    
    4.25
    %
    
    
    4.44
    %Short-term debt outstanding at end of period
    
    $
    6,568
    
    
    $
    20,075
    
    
    $
    115,304Weighted average rate on outstanding short-term debt
    
    
    5.08
    %
    
    
    4.43
    %
    
    
    2.53
    %Maximum outstanding short-term debt at any month end
    
    $
    37,590
    
    
    $
    123,968
    
    
    $
    122,693Average outstanding short-term debt
    
    $
    18,129
    
    
    $
    82,665
    
    
    $
    64,736Approximate average rate paid on short-term debt
    
    
    4.99
    %
    
    
    3.10
    %
    
    
    1.80
    %
  Subsidiary Activities
   SUPERVISION AND REGULATION
 Regulation of the Company
 General.
 16




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17




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##### Table of Contents



Dividends.
 Stock Repurchases.
 Capital Requirements.
 Regulation of the Bank
 General.
 18




---



##### Table of Contents



Capital Adequacy.
   19




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##### Table of Contents



Branching. de novo
 Dividend Limitations.
  Insurance of Deposit Accounts.
 20




---



##### Table of Contents



Transactions with Affiliates.
 Loans to Directors, Executive Officers and Principal Stockholders.
 21




---



##### Table of Contents



Enforcement.
  Personnel
  Executive Officers of the Registrant
  Michael L. Middleton
 C. Marie Brown
 Gregory C. Cockerham
 William J. Pasenelli
 22




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##### Table of Contents



James M. Burke
 James F. DiMisa
 
 Item 1A. Risk Factors
 An investment in shares of our common stock involves various risks. Our business, financial
condition and results of operations could be harmed by any of the following risks or by other risks
that have not been identified or that we may believe are immaterial or unlikely. The value or
market price of our common stock could decline due to any of these risks, and you may lose all or
part of your investment. The risks discussed below also include forward-looking statements, and
our actual results may differ substantially from those discussed in these forward-looking
statements.
 Our business strategy includes the continuation of significant growth plans, and our financial
condition and results of operations could be negatively affected if we fail to grow or fail to
manage our growth effectively.
  Certain interest rate movements may hurt our earnings.
  Our increased emphasis on commercial and construction lending may expose us to increased lending
risks.
  23




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##### Table of Contents



Our recent results may not be indicative of our future operating results.
  Strong competition within our market area could hurt our profits and slow growth.
  If we do not achieve profitability on our new branch, it may negatively impact our earnings.
  If the value of real estate in southern Maryland were to decline materially, a significant portion
of our loan portfolio could become under-collateralized, which could have a material adverse effect
on us.
  24




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##### Table of Contents



Our business is subject to the success of the local economy in which we operate.
  The trading history of our common stock is characterized by low trading volume. Our common stock
may be subject to sudden decreases.
   Ø
    
    actual or anticipated fluctuations in our operating results;Ø
    
    changes in interest rates;Ø
    
    changes in the legal or regulatory environment in which we operate;Ø
    
    press releases, announcements or publicity relating to us or our competitors or
relating to trends in our industry;Ø
    
    changes in expectations as to our future financial performance, including financial
estimates or recommendations by securities analysts and investors;Ø
    
    future sales of our common stock;Ø
    
    changes in economic conditions in our marketplace, general conditions in the U.S.
economy, financial markets or the banking industry; andØ
    
    other developments affecting our competitors or us.
  25




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##### Table of Contents



We operate in a highly regulated environment and we may be adversely affected by changes in laws
and regulations.
  Provisions of our articles of incorporation, bylaws and Maryland law, as well as state and federal
banking regulations, could delay or prevent a takeover of us by a third party.
  
 Item 1B. Unresolved Staff Comments
  26




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##### Table of Contents



Item 2. Properties
  Year Facility
    
    Leased
    
    Date of
    
    ApproximateOffice
    
    Commenced
    
    or
    
    Lease
    
    SquareLocation
    
    Operation
    
    Owned
    
    Expiration
    
    FootageMain Office3035 Leonardtown Road
    
    1974
    
    Owned
    
    
    
    
    
    
    16,500Waldorf, MarylandBranch Offices22730 Three Notch Road
    
    1992
    
    Owned
    
    
    
    
    
    
    2,500Lexington Park, Maryland25395 Point Lookout Road
    
    1961
    
    Owned
    
    
    
    
    
    
    1,700Leonardtown, Maryland101 Drury Drive
    
    2001
    
    Owned
    
    
    
    
    
    
    2,645La Plata, Maryland10321 Southern Maryland Boulevard
    
    1991
    
    Leased
    
    
    2009
    
    
    
    2,500Dunkirk, Maryland8010 Matthews Road
    
    1996
    
    Owned
    
    
    
    
    
    
    2,500Bryans Road, Maryland20 St. Patricks Drive
    
    1998
    
    Leased (Land)
    
    
    
    
    
    
    2,840Waldorf, Maryland
    
    
    
    Owned (Building)30165 Three Notch Road
    
    2001
    
    Leased (Land)
    
    
    2026
    
    
    
    2,800Charlotte Hall, Maryland
    
    
    
    Owned (Building)200 Market Square
    
    2005
    
    Leased (Land)
    
    
    2028
    
    
    
    2,800Prince Frederick, Maryland
    
    
    
    Owned (Building)
 
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Security Holder Matters and Issuer
Purchases of Equity Securities
 Market Price and Dividends on Registrants and Related Stockholder Matters.
  27




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##### Table of Contents



Stock Performance Graph.
  Recent Sales of Unregistered Securities.
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers for the Most Recent Fiscal
Quarter.
 Total Numberof SharesPurchased
    
    
    Maximumas Part of
    
    
    Number of SharesTotal
    
    
    
    
    
    
    Publicly
    
    
    that May Yet BeNumber of
    
    
    Average
    
    
    Announced Plans
    
    
    Purchased UnderShares
    
    
    Price Paid
    
    
    or
    
    
    the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsOctober 2006Beginning date: October 1Ending date: October 31
    
    
    10,089
    
    
    $
    23.33
    
    
    
    10,089
    
    
    
    64,900November 2006Beginning date: November 1Ending date: November 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,900December 2006Beginning date: December 1Ending date: December 31
    
    
    1,163
    
    
    
    23.94
    
    
    
    1,163
    
    
    
    63,737Total
    
    
    11,252
    
    
    $
    23.40
    
    
    
    11,252
    
    
    
    63,737
 
 (i)
    
    On October 25, 2004, Tri-County Financial Corp. announced a repurchase program under which it
would repurchase 39,000 shares. The Board of Directors authorized three-for-two stock splits
of Tri-County Financials common stock in December 2004, December 2005 and November 2006,
increasing the shares under this program to 131,625. The repurchase program will continue
until it is completed or terminated by the Board of Directors. 
 Item 6. Selected Financial Data
  
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation
  28




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosure About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  
 Item 9A. Controls and Procedures
   
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
   29




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##### Table of Contents



Item 11. Executive Compensation
   
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
 (a) Security Ownership of Certain Owners
  (b) Security Ownership of Management
  (c) Changes in Control
  (d) Equity Compensation Plan Information
  30




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##### Table of Contents



(c)Number of securities remaining(a)

    
    (b)

    
    available for future issuanceNumber of securities to be issued

    
    Weighted average exercise

    
    under equity compensation plansupon exercise of outstanding

    
    price of outstanding options,

    
    (excluding securities reflected inPlan Category
    
    options, warrants, and rights

    
    warrants, and rights

    
    column (a))Equity plans
approved by
security holders
    
    
    356,897
    
    
    
    $14.00
    
    
    
    158,999Equity compensation
plans not approved
by security holders
(1)
    
    
    60,200
    
    
    
    13.05
    
    
    
    Total
    
    
    417,097
    
    
    
    $13.86
    
    
    
    158,999
 
 (1)
    
    Consists of the Companys 1995 Stock Option Plan for Non-Employee Directors, which expired in
2005 and which provided grants of non-incentive stock options to directors who are not
employees of the Company or its subsidiaries. Options were granted under the plan at an
exercise price equal to their fair market value at the date of grant and had a term of ten
years. Options are generally exercisable while an optionee serves as a director or within one
year thereafter. 
 Item 13. Certain Relationships and Related Transactions
   
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a) List of Documents Filed as Part of this Report
 Financial Statements
 
 Financial Statement Schedules .
 Exhibits
 31




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##### Table of Contents



No.
    
    Description3.1
    
    Articles of Incorporation of Tri-County Financial Corporation (1)3.2
    
    Amended and Restated Bylaws of Tri-County Financial Corporation (2)10.1*
    
    Tri-County Financial Corporation 1995 Stock Option and Incentive Plan, as amended (3)10.2*
    
    Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee
Directors, as amended (4)10.3*
    
    Employment Agreements with C. Marie Brown, as amended, and Gregory C.
Cockerham (5)10.4*
    
    Employment Agreement with Michael L. Middleton (6)10.5*
    
    Guaranty Agreements with Michael L. Middleton, C. Marie Brown and Gregory C.
Cockerham (3)10.6*
    
    Executive Incentive Compensation Plan (3)10.7*
    
    Executive Compensation Plan 2003 Amendment (7)10.8*
    
    Employment Agreement with William J. Pasenelli (3)10.9*
    
    Retirement Plan for Directors10.10*
    
    Split Dollar Agreements with Michael L. Middleton and C. Marie Brown (3)10.11*
    
    Guaranty Agreement with William J. Pasenelli (5)10.12*
    
    Split Dollar Agreement with William J. Pasenelli (5)10.13*
    
    Salary Continuation Agreement with Michael L. Middleton (7)10.14*
    
    Salary Continuation Agreement with C. Marie Brown (7)10.15*
    
    Salary Continuation Agreement with Gregory C. Cockerham (6)10.16*
    
    Salary Continuation Agreement with William J. Pasenelli (6)10.17*
    
    Amendment to the Community Bank of Tri-County Employment Agreement with C. Marie
Brown (7)10.18*
    
    Amendment to the Community Bank of Tri-County Employment Agreement with Gregory C.
Cockerham (8)10.19*
    
    Amendment to the Community Bank of Tri-County Employment Agreement with William J.
Pasenelli (8)10.20*
    
    Tri-County Financial Corporation 2005 Equity Compensation Plan (9)10.21*
    
    Community Bank of Tri-County Deferred Compensation Plan13
    
    Annual Report to Stockholders for the year ended December 31, 200614
    
    Code of Ethics (10)21
    
    Subsidiaries of the Registrant23
    
    Consent of Stegman & Company31.1
    
    Rule 13a-14a Certification of Chief Executive Officer31.2
    
    Rule 13a-14a Certification of Chief Financial Officer32
    
    Certification pursuant to 18 U.S.C. Section 1350
 
 *
    
    Management contract or compensatory arrangement.(1)
    
    Incorporated by reference to the Registrants Registration Statement on Form
S-4 (No. 33-31287).(2)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006.(3)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.(4)
    
    Incorporated by reference to the Registrants Registration Statement on Form
S-8 (File No. 333-70800).(5)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.(6)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2006.(7)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.(8)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005.(9)
    
    Incorporated by reference to Appendix A in the definitive proxy statement
(File No. 000-18279) filed with the Securities and Exchange Commission on April 11,
2005.(10)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2005. 
 32




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##### Table of Contents



(b)
    
    Exhibits.The exhibits required by Item 601 of Regulation S-K are either
filed as part of this Annual Report on Form 10-K or incorporated by reference herein.(c)
    
    Financial Statements and Schedules Excluded From Annual Report.There
are no other financial statements and financial statement schedules which were excluded
from this Annual Report pursuant to Rule 14a-3(b)(1) which are required to be included
herein.
 33




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate: March 26, 2007
    By:

/s/
Michael L. MiddletonMichael L. MiddletonPresident and Chief Executive Officer
(Duly Authorized Representative)  By:
    
    /s/ Michael L. Middleton
    
    
    
    By:
    
    /s/ William J. PasenelliMichael L. Middleton
    
    
    
    
    
    William J. PasenelliDirector, President and Chief Executive Officer
    
    
    
    
    
    Chief Financial Officer(Principal Executive Officer)
    
    
    
    
    
    (Principal Financial and Accounting Officer)Date: March 26, 2007
    
    
    
    Date: March 26, 2007By:
    
    /s/ C. Marie Brown
    
    
    
    By:
    
    /s/ Herbert N. Redmond, Jr.C. Marie Brown
    
    
    
    
    
    Herbert N. Redmond, Jr.Director and Chief Operating Officer
    
    
    
    
    
    DirectorDate: March 26, 2007
    
    
    
    Date: March 26, 2007By:
    
    /s/ H. Beaman Smith
    
    
    
    By:
    
    /s/ A. Joseph Slater, Jr.H. Beaman Smith
    
    
    
    
    
    A. Joseph Slater, Jr.Director
    
    
    
    
    
    DirectorDate: March 26, 2007
    
    
    
    Date: March 26, 2007By:
    
    /s/ Louis P. Jenkins, Jr.
    
    
    
    By:
    
    /s/ James R. ShepherdLouis P. Jenkins, Jr.
    
    
    
    
    
    James R. ShepherdDirector
    
    
    
    
    
    DirectorDate: March 26, 2007
    
    
    
    Date: March 26, 2007By:
    
    /s/ Philip T. Goldstein
    
    
    
    By:
    
    /s/ Joseph V. Stone, Jr.Philip T. Goldstein
    
    
    
    
    
    Joseph V. Stone, Jr.Director
    
    
    
    
    
    DirectorDate: March 26, 2007
    
    
    
    Date: March 26, 2007